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Will Dodd-Frank amount to a hill of beans after the midterms?

Most polls, political pundits, and crystal balls are predicting a larger crowd on the Republican side of the aisle after the midterm elections, potentially giving them a majority in the House and tightening the margin in the Senate. The natural question that follows is what will happen to Dodd-Frank if the composition of Congress changes significantly? Is it possible that with a Republican majority the House may seek to repeal one of the most controversial pieces of legislation enacted by the Obama administration? Pulling out our own crystal balls, and acknowledging that not all precincts have reported in, our prediction is that even a Republican majority would have a difficult time repealing Dodd-Frank, but may instead seek to limit the law’s application either by exercising Congressional oversight authority or limiting funding. In the event that Republicans regain control of both chambers of Congress and gut the law, it is likely that President Obama would exercise his veto authority, blocking repeal.

Whether Democrat or Republican, most policymakers can probably agree that there are provisions of Dodd-Frank that aren’t clear. We have previously written about the vague and broad sweeping provisions of the liquidation section of Dodd-Frank. For example, one of the provisions in the liquidation authority section of Dodd-Frank that is troubling from a creditor’s perspective is the unlimited priority for “amounts owing to the United States” in the unsecured claims waterfall. Specifically, this provision provides that all amounts owing to the United States must be paid prior to other unsecured creditors. Dodd-Frank fails to clarify the type of claims this was meant to cover. Are “all” amounts owing to the United States or just certain types of claims covered? This is one of the provisions where rulemaking could have a significant impact, and Congress could help curtail the effects of Dodd-Frank on creditors by calling regulators to task in Congressional hearings, possibly leading to changes to the law.

Typically, another way for legislators to limit the impact of a new law is through the appropriations process—agency budgets for implementing changes required by law need Congressional approval. However, unlike the SEC and the CFTC which are relying on increased appropriations to hire an estimated 800 and 200 new staff respectively to fulfill the requirements of the new law, the FDIC does not rely directly on Congressional appropriations for funding. Historically, the FDIC was funded by premiums paid by banks and thrift institutions and from earnings on investments in U.S. Treasury securities. Pursuant to Dodd-Frank, the FDIC will be appointed as Receiver of not only banks and thrifts but of financial companies that are in danger of default and the failure of which could have an adverse impact on the financial stability of the United States. This appointment even trumps ongoing chapter 11 cases that the financial company may have initiated voluntarily in order to negotiate with its creditors. Liquidating a company requires significant, and often expensive, resources. Because the FDIC will almost certainly need additional staff and resources to carry out its receivership duties, under Dodd-Frank, the FDIC is authorized to borrow from the Treasury or access the Orderly Liquidation Fund to meet these needs. Congress could provide additional limitations on the access to these funds, or the ability to borrow from the Treasury. If this happens, then as a result the Secretary of the Treasury and the Board of Governors could become more selective in appointing the FDIC as Receiver, or at the least may not appoint a Receiver when the financial company is already in chapter 11 proceedings.